Buy Anant Raj Ltd For Target Rs.710 Motilal Oswal Financial services Ltd
Plans to demerge the data center business
The Board of Anant Raj (ARL) has approved a composite scheme arrangement to demerge its data center (DC) and cloud businesses into Ashok Cloud Pvt Ltd (ACPL). ARL shareholders will receive one ACPL share for every ARL share held. ACPL would offer a pure play on the DC business, which is a key value generator, while ARL would continue to reap the economic benefits due to its holding in the resulting company. Post-demerger, the shareholding of the promoter group in ACPL would be 79.14%; this could likely trigger a stake dilution to bring down this shareholding to 75% or below. Proceeds could be utilized to fund the growth capex of the DC business.
As a merged entity, the existing mode of operations involves utilization of the free cash flow from the real estate business to scale up the capex-heavy DC business. With the demerger being planned, we anticipate future capex in ACPL to be met through the rental income generated by the operational capacity (28MW as of FY26) and fund transfer from ARL (earmarked for the DC business). A likely fundraising from the promoter stake dilution in ACPL post-demerger could be an additional avenue to fund the DC growth capex. Management’s roadmap on the demerger process, utilization of free cash from the real estate business in ARL after the demerger, and capex funding plans for the DC business in ACPL remain some of the key monitorables. We reiterate our BUY rating with a revised SoTP-based TP of INR710.
The Board approves the demerger of the DC business
Under the approved Composite Scheme of Arrangement, Anant Raj Cloud Pvt Ltd (ARCPL), a wholly owned subsidiary of ARL, will first be merged into ARL and consequently cease to exist, resulting in the consolidation of the entire DC and Cloud business within ARL. Subsequently, the consolidated DC and cloud business will be demerged into ACPL; this will remain a subsidiary of ARL and will be listed separately. As part of the demerger, ARL shareholders will receive one ACPL share for every ARL share held. This demerger is subject to necessary approvals of relevant stakeholders.
Promoters to retain effective control of the DC business
Since ACPL will be the subsidiary of ARL after the demerger, 51% of ACPL’s shareholding will be held by ARL. The remaining 49% in ACPL will be held by the shareholders of ARL proportionate to their stake in ARL. Currently, the promoters hold a 57.43% stake in ARL. Consequently, as per the arrangement, the promoter’s stake in ACPL after the demerger will be 79.14% (51% + 28.14%). This would likely trigger stake dilution by the Promoter Group to bring down the shareholding to 75% or below (regulatory norms); the proceeds could be utilized to fund the growth capex of the DC business. The proposed ownership structure preserves strategic control of the DC and cloud platform while enabling the business to operate as a separately listed entity.
Valuation and view
* We have discounted the residential business cash flow at a 12.4% WACC, while assigning a 25% premium to capture the growth potential, since the company is aggregating land in Sector 63A, Gurugram.
* The commercial business cash flow is discounted at a capitalization rate of 8.0%, while delivering a 4% terminal growth rate.
* The data center business is valued on a DCF basis.
* We reiterate our BUY rating on the stock with a revised TP of INR710, based on our SoTP valuation.
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